Modification Work Which Becomes a Component Part of an Airplane Leased by Common Carrier Is Not Exempt from Tax

Plaintiff engaged in the business of leasing transport category aircraft. Plaintiff and one of its common carrier lessees agreed that a leased aircraft would be modified to increase its load carrying capacity and engine power. The modification work was performed by a separate firm. The engines were removed from the airplane, delivered to the repair firm, and reinstalled when the modification was completed. The Board taxed the modification and tax was paid by the repair firm. Plaintiff reimbursed the repair firm for the amount of tax and the repair firm assigned its refund claim to plaintiff. After denial of the claim by the Board, plaintiff sought recovery in Superior Court on the basis that the modification work should be considered exempt as a sale, use, or other consumption of aircraft provided to common carriers pursuant to Revenue and Taxation Code Sections 6366 and 6366.1(a). The court of appeal held that Sections 6366 and 6366.1(a) do not exempt the gross receipts from the sale in this state of tangible personal property thereafter becoming component parts of aircraft which have already been sold, leased, or sold for the purpose of leasing, to persons using such aircraft as common carriers of persons or property. The engine modifications performed on the aircraft owned by plaintiff were therefore properly subject to tax. National Aircraft Leasing, Ltd. v. State Board of Equalization (1979) 90 Cal.App.3d 549.

Mail Order Vendors Liable for Collection of Use Tax if They Have Offices in California, Even if the Activities Conducted at Those Offices Are Unrelated to Mail-Order Sales

Plaintiff distributes magazines to subscribers within California and also sells maps, atlases, globes, and books by mail order to California consumers. Plaintiff maintains two offices in California for the purpose of soliciting advertising in the magazine. During a portion of the period in question, sales of the maps, atlases, globes, and books were also made from these offices, but during the remainder of the period, the activity of the offices was limited to solicitation of advertising. The Board collected use tax from plaintiff for the mail order sales on the basis that the plaintiff was liable for tax that it should have collected from its California customers. Plaintiff then sued for a refund of these amounts on the basis that the requirement for it to collect use tax on its sales to California residents was a violation of due process and an unconstitutional burden on interstate commerce, particularly since the offices maintained in the state were not associated with the sales of its products within the state for a portion of the period.

The California Supreme Court upheld the Board, basing its decision on the principle that where a state has given something for which it may ask a return, the requirement for collecting use tax is not unconstitutional. The court ruled that where an out-of-state seller conducts a substantial mail order business with residents of this state, and the seller's connection with the state is not exclusively by means of interstate commerce, the slightest presence of the seller within the state independent of the interstate commerce connection will permit the state constitutionally to impose on the seller the duty of collecting the use tax from mail order purchasers and the liability for failure to do so. The court stated that the mail orders were part of the plaintiff's business in California and rejected as of no constitutional significance its claim that its in-state activities are "dissociated" from its mail order activities. The United States Supreme Court affirmed, but made it clear that it did not necessarily agree with the California Supreme Court's "slightest presence" standard of constitutional nexus. The U.S. Supreme Court held that National Geographic's maintenance of two offices in California, and solicitation by employees of advertising copy in the range of $1 million annually, establish a much more substantial presence than the expression "slightest presence" connotes. National Geographic Society v. State Board of Equalization (1977) 430 U.S. 551, 51 L.Ed.2d 631.

Use Tax on Railroad Passenger Cars Discriminated Against Rail Carrier

The National Railroad Passenger Corp. (Amtrak) purchased 15 railroad passenger cars which were first used in California. The Board assessed use tax of $978,000 against Amtrak on these purchases. Amtrak contended that the Federal Railroad Revitalization and Recovery Act, which prohibits any state tax which discriminates against a rail carrier, barred imposition of the use tax on Amtrak. Amtrak further argued that since the California use tax does not apply to purchases of commercial passenger aircraft, commercial passenger watercraft, or rail freight cars, it should not apply to purchases of railroad passenger cars.

The United States District Court for the Northern District of California held in favor of Amtrak. The court held the use tax was discriminatory under the federal Act, and that the Act did not require that a rail carrier must show it is in competition with other types of passenger carriers whose purchases are exempt from tax. Also, the tax was not de minimis, since the amount assessed was almost $1 million, and the tax would apply to all railroad passenger cars first used in California. National Railroad Passenger Corp. v. California State Board of Equalization (1986) 652 F.Supp. 923.

Transfers of Drawings and Designs, Manuals and Procedures, and Computer Programs Are Taxable Sales of Tangible Personal Property

One corporation sold all of the assets of its solar division to another corporation. At the time of the sale, the corporations agreed to allocate the purchase price among the various assets to be transferred. The assets that were the subject of the tax dispute in this case fell into three categories: drawings and designs, manuals and procedures, and computer programs. The Board determined that the assets constituted tangible personal property, and that their sale was subject to sales tax. The corporations filed an action for refund in superior court, and the court ruled in favor of the Board. After the Court of Appeal affirmed the trial court's judgment, the California Supreme Court granted review.

Plaintiffs argued that with respect to sales of the drawings and designs, and the manuals and procedures, the objective of the purchaser was primarily to acquire the intellectual content embodied in the physical objects, not to acquire the objects themselves. Thus, plaintiffs contended, the transfer was not a sale of tangible personal property, so it was not subject to sales tax. With respect to the computer software, plaintiffs argued that it was "custom" software, and therefore was not taxable. The Supreme Court affirmed the judgment of the Court of Appeal, holding that the sale of drawings and designs, and manuals and procedures, constituted a taxable sale of tangible personal property. The sale of the documents was not excluded from tax as being incidental to the performance of a service under Regulation 1501; the sale was subject to tax regardless of the fact that the documents were not physically useful in the manufacturing process; and the characterization of the documents as intangibles for federal tax purposes was not determinative of characterization for sales tax purposes. The court also held that the computer programs did not qualify as custom computer programs. Although they were initially developed on a custom basis, the subsequent sales were taxable sales of prewritten programs, not of custom computer programs as defined in Revenue and Taxation Code section 6010.9. Navistar Internat. Transportation Corp. v. State Board of Equalization (1994) 8 Cal.4th 868.

Exempt Lease of Mobile Transportation Equipment Does Not Include Transfer of Ownership of Vehicles Already Leased

Taxpayers were motor vehicle leasing companies that acquired mobile transportation equipment from other leasing companies. Taxpayers assumed the outstanding leases on the equipment, and also assumed the transferors' unpaid obligations to their lenders for the equipment.

The Board determined use tax on the purchases, measured by the amounts owed on the loans. Taxpayers sought refunds, and the trial court entered judgment for the Board.

The court of appeal affirmed. The court held that the exclusion from the definition of "sale" for leases of mobile transportation equipment did not apply to these transactions. Taxpayers did not lease the equipment from the transferors, but rather acquired all the indicia of ownership of the equipment. The court also held that the consideration paid for the equipment was the taxpayers' assumption of the liabilities owed by the transferors, and tax was properly measured by those amounts. Newco Leasing, Inc., et al. v. State Board of Equalization (1983) 143 Cal.App.3d 120.

The Court of Appeal held that certain agreements, under which the taxpayer licensed software programs to run telephone switches it sold to its customer, qualified as technology transfer agreements (TTAs), so that the portions of the lump-sum charges attributable to licenses of intangible patent and copyright interests were excluded from tax. The Court of Appeal further held that licenses of certain prewritten programs that provided the taxpayer's customer various administrative functions in connection with the operation of the switches also qualified for TTA treatment. In so holding, the Court of Appeal held invalid a portion of Sales and Use Tax Regulation 1507 providing that sales of prewritten software could never qualify for TTA treatment. Nortel Networks Inc. v. Board of Equalization (2011) 191 Cal.App.4th 1259.

Taxpayer Sold Tooling to Purchaser Even Though Legal Title Was Retained as Security

Northrop entered into a contract with an airplane manufacturer to manufacture certain fuselage and wing fairing parts for model 747 airplanes. The contract required Northrop to use certain specially designed tooling it either fabricated or purchased. The Board assessed tax on Northrop's sale of the tooling, and Northrop brought an action to recover the tax. The court of appeal held that there was a sale by Northrop of the tooling, notwithstanding the fact that the contract provided for retention of legal title to the tooling by the seller as security for the purchase price of the parts sold.

The provisions of the sale agreement gave the buyer almost absolute control over the use and disposition of the tooling, including an irrevocable power of attorney from the seller to execute in its name any documents appropriate to transfer of the tooling. Northrop Corporation v. State Board of Equalization (1980) 110 Cal.App.3d 132.